Best Use of Extra Money - Investing Versus Paying off Mortgage Debt

Updated on September 11, 2011

Suppose you want to get rid of debt worth 40000 dollars
(Rs 18 lakhs) and as assets you have two residential properties, one is a house
you have taken on loan in which you are living worth 90000 dollars (40.5 lakhs
INR) and another is a house worth 40000 dollars (Rs 18 lakhs), which you have
inherited and is empty. You cannot sell the house where you are living but you
can sell the house, which is empty or is of no use. The total 40000 dollars
worth of debt is from:

Now how you will make the maximum use of your all assets
to erase debt and make best use of extra money?

1.
Will you pay back debt by selling the empty house?

2.
Will you invest money in buying real estate in a hot location?

3.
Will you invest in commodities like stock, etc.?

4.
Will you buy mutual funds?

5.
Will you keep the empty house (extra money) as it is?

Everyone says get rid of debt

There are many people around the world who have
questions similar to above questions in their mind and many have solutions and
make the best use of extra money they have, but whenever you will ask these
questions to your friends or colleagues or an average person, everyone will say
“Pay Off Your Debt” and have peace of mind and live a happy and fruitful life,
but don’t you think that if you will pay off debt with all the extra money,
what you will have in your hand, just the extra income that you are left every
month. In simple words, the income that was previously going in paying debts as
equated monthly installments will be completely yours and you can do whatever
with that income invest or spend but my dear friend you must know it then
whenever we have extra income, we “Spend More Than What Is Required”.

Finance tips to make best use of extra money

Now let’s come to the point, according to me, you need to
make a proper plan to pay off debt, do some investment, and earn money which
can serve as your long-term retirement income. For doing this you need to
follow these steps:

Sell the empty house for 40000 dollars and pay off 10000
dollars of debt on car loan and personal loan, which have high interest rates
than mortgage loan. This will remove the extra stress on your monthly income
deleting major EMIs from your monthly budget.

The above mutual fund providers are for example only and
you need to do a little bit of market research to find the best providers.

You can go for different mutual fund providers because
there will be no risk in doing that. For example if your HDFC mutual fund
income goes down and Reliance mutual fund investment goes up, it will
compensate it. If Tata mutual fund goes down, SBI mutual fund will be there to
compensate the losses. The idea is to earn an average income from different
providers in a short period of time.

In this way, at the end of 5 years, you will have
increased your income by investing in mutual funds in SIP scheme. Your initial
investment was 30000 dollars which will reach somewhere around 50000 dollars.

So now you have 30000 dollars to pay off your mortgage
debt and also have 20000 dollars extra money you have earned from SIP mutual
funds, which you can reinvest for another 5 years or 10 years or do whatever
you want to do with that.

You will also have extra money in your pocket every
month as your debt has been cleared and there are no monthly installments. You
will be able to achieve healthy personal finances.

Your Money: Investing vs paying off debt?

Always remember that life always gives us several
different options to choose, but we need to be smart enough to choose the right
option and change the way we live. If you choose to sell your empty house and
pay off debt with extra money, you will have little in your hands but if you
will pay off debt on loans at high interest rates and invest the remaining
funds in different investment schemes, you can change your life. Least but not
last, every type of investment carries a certain risk and you need to be
prepared for that.

Best of luck

P.S.: In the above example:

I talked about investing in SIP mutual funds because
they carry little risk of investment and highest returns compared to investing
in stocks, shares, and other commodities.

Also, investing in high performing real estate is
another good option but you need to give it at least 10 years to achieve best
results.

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Comments 8 comments

Having a fallback option is the best way to pay off one's debt; like you've cited here. Thanks, Soni! :D

soni2006 5 years ago from New Delhi, India Author

It's my pleasure friend. I will write more on debt management.

LillyGrillzit 5 years ago from The River Valley, Arkansas

You are very wise! In the US, there is a tax deduction for interest paid on a home mortgage, so as you stated, it would be smarter to pay off high int. debt, and pay down some applied directly to the principle. Very wise.

Simone Smith 5 years ago from San Francisco

Thanks for the discussion, soni2006! Great Hub.

soni2006 5 years ago from New Delhi, India Author

Yes paying off high interest debt especially credit cards first, then personal loan, then auto loan, then home loan is the right way to pay debt. Some people say that we get relaxed with paying off debt fist and then investment and I agree that this is our psychological behavior but a person can think the other way out by choosing some smart investments and finish off his debt early with innovative investment than was possible with the traditional or usual manner of paying debt.

By the way, thanks a lot Simone for your honorable mention of this hub in the hubpages thread. I am glad that at least I was so close to win.

And Lori, thank you too for your motivating comments and visits. Best of luck to you too.

Brinafr3sh 5 years ago from West Coast, United States

Hi Soni,

Nice to know about how to manage finances in a prioritized way. This will help for my future; the money market account seems easy to start. Thanks